Passion and commitment drive the small business owner. Endless weeks, forsaken weekends and sleepless nights are business as usual, and there have probably been times when you’ve skipped a pay cheque. You’re not alone, with 38% of business owners telling us they don’t take a salary in our survey of 1,000 U.S. small business owners.
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Why should business owners pay themselves?
It’s not unusual for small businesses to save money wherever possible, but there are many reasons that paying yourself really does pay off.
Safeguarding your future
The reality of small business is that you never know what’s around the corner. With all your eggs in one basket, you put yourself at risk of losing everything if the worst were to happen. By storing up savings instead, you give yourself protection and independence come what may.
Showing your commitment
Paying yourself a sensible amount looks good to investors as well as banks and other financial companies. Your willingness to invest in (and take care of) yourself demonstrates a high level of commitment and confidence in the health of your business.
Taking care of number one
Everyone’s heard of the “trickle down” effect, and a good leader who cares for their staff and business needs to show that care for themselves too. Stress and bad health lead to poor productivity, impacting how you and your team work.
Saving for growth
Building up personal savings can directly benefit your business when it’s time to grow. With your own independent pot of money you can call more of the shots without relying on others. If you need to expand your space, for example, those savings reduce the size of loan you need.
How much should you pay yourself?
Business owners can only pay themselves from the company’s profits, not its revenue. What constitutes a “reasonable” pay cheque is different for every business, and is most dependent on where you live and what your family setup is. There are some basic needs that everybody needs to take care of regardless:
- Rent or mortgage payments
- Household bills
- Council tax
- Food and drink
- Loan repayments
- Life essentials like clothes and toiletries
- Transport (if you don’t walk to work)
Once you’re sure you can cover these, you can then decide if anything extra is warranted. The three questions to ask yourself are:
- What’s the market salary rate for the type of work I do?
- How much money do I want and need to leave in the company’s profit pot?
- How much do I need to save over the year?
How do you pay yourself?
There are different ways to pay yourself depending on whether you’re self-employed or the owner of a limited company. If you’re not sure which is which, definitely consult a lawyer or tax adviser to make sure you’re doing everything by the book.
Not following these procedures and simply dipping into your business is against the law, so have a think about which processes are most suitable — many business owners use a mix.
If you’re the owner of a limited company
Paying yourself through PAYE
You’ll be familiar with the PAYE system if you’ve worked for other employers in the past. The process is simple — every month you decide how much you need to pay yourself, then make the payment (less income tax and NI) online. To set up a PAYE system, you’ll need to register through HMRC and follow their process.
Paying yourself through dividends
Dividends are payments made to company shareholders. The tax-free dividend allowance for 2018 to 2019 is £2,000. You can find out how much you’ll be taxed if you pay yourself more than that allowance on the gov.uk website.
If you’re self employed
If you’re self-employed, you can simply pay yourself directly from the money you earn — less tax, of course. The process works like this:
- You invoice a client
- The client pays into your bank account
- You calculate how much tax is due and what other business outgoings need to be deducted
- Whatever is left after these deductions is yours to use as your own salary
Setting up a business bank account to act as the destination for all business-related payments keeps your finances clean and makes them easier to consolidate. You can transfer your wages to a personal account, leaving your actual business’s money undisturbed.
It’s not easy working out your tax, especially if your income fluctuates throughout the year. Accounting platforms like Xero or FreeAgent will do the maths for you and even pay tax to HMRC automatically. All you need to do is declare your incomings and outgoings over the year and complete your tax information.
Running a business is tough work that requires sacrifice, but it’s rarely best to forgo paying yourself — short term wins may lead to a bigger hit to the company down the line. Don’t be afraid to reach out to an accountant or another business owner who can assist as you navigate these financial decisions. They’ll be able to give you general advice and help you choose what a reasonable and sensible amount to pay yourself is.